What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Inner Mongolia Yili Industrial Group (SHSE:600887) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Inner Mongolia Yili Industrial Group:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.14 = CN¥11b ÷ (CN¥149b - CN¥72b) (Based on the trailing twelve months to September 2023).

Thus, Inner Mongolia Yili Industrial Group has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Food industry.

Check out our latest analysis for Inner Mongolia Yili Industrial Group

In the above chart we have measured Inner Mongolia Yili Industrial Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Inner Mongolia Yili Industrial Group.

How Are Returns Trending?

When we looked at the ROCE trend at Inner Mongolia Yili Industrial Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 14% from 26% five years ago. However it looks like Inner Mongolia Yili Industrial Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Inner Mongolia Yili Industrial Group's current liabilities are still rather high at 48% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Inner Mongolia Yili Industrial Group's ROCE

Bringing it all together, while we're somewhat encouraged by Inner Mongolia Yili Industrial Group's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 31% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you're still interested in Inner Mongolia Yili Industrial Group it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.